SGS SA
SIX:SGSN
SGS SA
SGS SA, a stalwart in the world of inspection, verification, testing, and certification, stands as a global beacon for quality and integrity. Originating from Geneva, Switzerland, this company has evolved since its inception in 1878 into a pivotal player in ensuring that products meet the regulatory standards and expectations of markets worldwide. With a sprawling network that touches nearly every part of the globe, SGS acts as a conductor in the symphony of international trade, offering services that range from inspecting the quality of commodities to verifying the authenticity of high-tech equipment. Their business model is hinged on a deeply-rooted commitment to precision and credibility, which engenders trust among businesses and consumers alike.
Generating revenue through its comprehensive and diversified suite of services, SGS thrives by addressing the intricate and varied needs of different industries. Its proficiency extends across sectors such as agriculture, minerals, oil and gas, consumer goods, and industrial manufacturing, among others. By offering services such as laboratory analysis, audits, certification, and training, SGS provides invaluable assurance to stakeholders that the goods and operations meet necessary compliance and quality benchmarks. The company's strength lies in its ability to adapt and innovate, ensuring that its offerings keep pace with evolving regulatory demands and technological advancements, thereby maintaining its position as a linchpin in global commerce.
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Despite facing inflation, high costs, and the Chinese operation's January closure, the company achieved an 8.5% total revenue increase at constant currency with organic growth at 8.1%. Adjusted operating income rose to CHF 462 million, an 11.3% uptick. Adjusted operating income margins improved from 13.7% to 14.1%, with the expectation of further improvement in 2023. Cash flow surged by 40% to CHF 360 million, while earnings per share remained steady due to foreign exchange impacts. The company's focus on sustainability has led to nearly half of its revenue aligned with their sustainability solutions framework, and it continues to drive initiatives to reduce greenhouse gas emissions. However, substantial forex headwinds resulted in actual revenue growth of just 0.9%, with a reported operating income virtually stable in real terms due to a 9.4% currency impact.
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Ladies and gentlemen, welcome to the 2023 Half Year Results Conference Call and Live Webcast. I am Alice, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast.
At this time, it's my pleasure to handover to Toby Reeks, Senior Vice President, Investor Relations, Corporate Communications and Sustainability. Please go ahead, sir.
Good afternoon or morning to you, and welcome to SGS first half 2023 results conference call. We hope that you’ve all had a good start to the year and we also hope to be able to meet many of you face-to-face over the next weeks and/or some point later this year.
In a few moments, I will pass over to Frankie and Dominik, who will run through our presentation and then we'll move on to Q&A. And as usual, when we have Q&A, please stick to a maximum of two questions. And if we have any time at the end, we can answer further questions if they haven't already been asked.
Once we have taken questions from the call, I will read out any questions that we may have submitted through the web. Finally, we should be finished in about an hour and so, we will try and keep it quite tight. So you guys can get back to your work.
And for now, I will hand over to Frankie to start the presentation. Please go ahead, Frankie.
Thank you, Toby. Good morning, good afternoon to everyone. So as usual, I will give you a highlight of our performances for H1. Dominik will provide you with a more detailed financial review and I will cover the business outlook for the second half, our full year guidance following by Q&A.
So to start -- let me move to slide. So to start, I'm pleased to say that with the operational measures we have taken while strong action on pricing and the benefit of continued investment in key sectors, we have delivered both strong organic growth for H1 and an improvement in our margins.
Growth (ph) has been strong globally with double-digit growth in Asia, including China, which benefited from the comparable of the lockdown, which occurred in March and April last year. We also had double-digit growth in the Americas, while Europe growth was strong.
This could result despite a few challenges faced early in the year, such as persistent high inflations, high energy and transportation costs, and the closure of most of our operations in China in January due to high sickness rate following the lifting of COVID restrictions.
To put some numbers around these performances, total revenue increased by 8.5% at constant currency, while organic growth was 8.1%. Adjusted operating income was CHF462 million, a good (ph) 11.3% increase at constant currency compared to 2022.
On a constant currency basis, our adjusted operating income margins improved to 14.1% compared to 13.7% in prior year, an increase of 40 bps. Our ROIC stands at 17.7% compared to 18.4% same period last year. It is the last 12-month number, so it was impacted by the second half of last year and we expect it to improve for the full year '23. Cash flow from operations increased by 40% to CHF360 million. And our basic earnings per share is CHF1.47 (ph), which is flat on last year given the strong impact from ForEx.
We continue to work towards our strategic targets. This slide highlights a few of those achieved so far this year. Dominik will provide you more details on the progress made in our Level Up initiative in a minute. I will just highlight a couple of achievements related to sustainability.
Revenue under our internal sustainability solution framework is now at 47.4%. This is due to the evolution of our portfolio mix in H1 and I'm looking at an improvement for full year '23 as we accelerate our portfolio in Health and Nutrition and other sustainability related services. You will recall that last year, we were the first TIC company to be approved for 1.5 degrees and net zero target for SBTi, the Science Based Target initiatives.
We have been reinforcing (ph) initiating programs to ensure we meet our SBTi target of reducing up to for scope 1 and 2, GHG emission by 46.2% and Scope 3 by 28% by 2030 from a baseline year of 2019. One important program is to improve the energy efficiency of our building across our network. So far this year, we have increased the number of these energy efficiency project by 40% compared to the number of the whole year of 2022.
We're also looking at more stringent energy efficiency criteria on all our CapEx, and we have initiated actions with procurement to tackle our Scope 3 emissions in our supply chain. More result of these actions will be reported as we move on through the year and next year.
We continue our acquisition strategy with allocation of capital in strategic priorities area. In the first half, we made two acquisitions and we acquired the remaining minority stakes of Leansis. In the same period, we made two small disposal to optimize our portfolio. So we acquired 60% of Nutrasource, a global contract research organization in the nutraceutical and pharmaceutical industry based in Canada.
Nutrasource supports our service portfolio expansion in North America and our strategic view of the convergence of health, nutrition and wellness sectors. We also acquired the testing business and asset from Asmecruz, a cooperative of mussels producers based in Spain with the objective of expanding our food testing services in Southern Europe and reinforce our position in the seafood industry.
As mentioned, we acquired the remaining 40% of Leansis, an operational consultancy business in Spain. The initial 60% was acquired in 2019 and we have since successfully expanded this activity in Spain and replicated it across several European countries. Next stage of development is the deployment of its service in Asia.
During the first half, we disposed of our automotive asset, assessment and retail networks services operations across 19 countries, as well as our subsurface consultancy business in the Netherlands, both activities have been with SGS for many years, but are seen as non-core in the mid-term to the Group. Their future is therefore better secure with their new owners and we wish them all the best in their new paths.
While the pace of M&A has slowed down this year, it remain an important priority in our capital allocation approach. We expect more activities into 2024. We're also continuing the management of our portfolio through targeted disposals.
On that, I'm going to hand over to Dominik for a more detailed review of the financials. Dominik, all yours.
Thank you, Frankie. Good afternoon, ladies and gentlemen. Please to the next slide. I will start with the overview of the financial highlights for the first half '23. Frankie already mentioned operating highlights in his introduction with revenues of CHF3.3 billion and adjusted operating income of CHF462 million, and the free cash flow of CHF130 million.
Revenues for the Group in constant currency increased strongly by 8.5%, which is primarily a function of the impact of pricing, more than half of it and good growth in volumes. Adjusted operating income increased by 11.3% to CHF462 million in constant currency. Consequently, AOI margin increased by 40 basis points in constant rate to 14.1%.
Net profit after minority interest was CHF272 million broadly stable as a strong operational performance was primarily offset by FX, given the material strengthening of the Swiss Franc against all relevant currencies of SGS. Cash flow from operating activities increased strongly with 40.3% to CHF369 million as the net working capital need was lower than in the prior year. Next slide, please.
As expected and as you have seen in today's release, the FX headwind is material on both revenues and profit. Our very strong revenue growth in constant rate of 8.5% is to a large extent offset by the impact of FX and while the margin increase of 40 basis points in consolidated shows the underlying operational leverage, and actual currency, the margin at actual rates remains flat.
On this slide, we outline a bit more where the currency headwinds are coming from and the impact. As you can see on the left side, the Swiss Franc materially strengthened against all major currencies leading to a negative currency impact of 7% on prior year H1 revenues. The impact on AOI is just minus 9.4% even more material and consequently, our AOI margin increase of 40 basis points in constant currency is an actual reported rate flat.
The higher impact on AOI compared to revenues is driven by the country mix, i.e., currencies of countries in which we achieve materially stronger profitability than the Group. For instance, China or Taiwan. FX weakening there had a proportionately stronger impact compared to others. Next slide, please.
Organic revenues increased strongly by 8.1% in H1 '23 of which more than half was generated by continued focus on pricing. Given the strong organic growth in H1 '23 and our view for the second half of the year, we now expect for '23 and overall organic growth of mid-single digit to high-single digit versus our previous guidance of mid-single-digit growth.
As expected, the contribution for acquisitions is 0.5%, very limited while disposal had an impact of minus 0.1%. As outlined before the negative currency impact was 7% material, leading to a revenue growth rate in actual rates of 0.9%.
Moving on to the revenue growth by business. Next slide, please. Organic growth in Connectivity and Products was 6.7% strong. Activities in China materially picked up after Chinese New Year and we had easier comps, especially in the second quarter given the lockdown in Shanghai in the prior year. Excluding China, growth in H1 was 3.5% very solid.
From a SBU point of view, connectivity, soft lines and hardlines showed all strong mid to high-single digit growth while growth in TFS was solid. Revenues in Health and Nutrition increased by 4.6%, supported by the continued focus on M&A. Organic growth was 2.7%. Food delivered high-single digit organic growth, driven by strong volumes across all regions.
In Health Science, organic revenue decreased slightly impacted by the lack of funding for new drug development and volumes normalizing to pre-pandemic levels. Excluding COVID-related testing, organic growth was solid driven by analytical services and clinical research.
Revenue growth in industrial environment was 7.6%, in constant currency 7.3% organically strong. Double-digit growth was achieved in industrial, public, health and safety as well as in field services and inspection. Public mandates grew high-single digit. Growth in environment testing was very solid, while the other SKUs posted lower-single digit growth.
The 10.7% organic growth in Natural Resources was driven by stronger growth across all SBUs and segments. The strongest growth was achieved in metallurgy and consulting as well as in the agriculture and minerals commodities. Our best growth was achieved in knowledge with 14.4%.
All SBUs posted double-digit growth. The strongest growth was delivered by customers' audits, benefiting from strong demand for supply chain audits, social audits and ESG assurance services. As well as consulting amongst other stream by the strong performance of main point, due to strong demand for supply chain optimization and performance improvement services. Next slide, please.
From a regional point of view, double-digit growth was achieved by the Americas and Asia Pacific. The Eastern Europe and Middle East countries achieved strong double-digit growth across most of its key end markets. Growth in the African countries was mid-single digit, while growth in the key European countries last to a large extent solid to mid-single digit.
In the Americas, revenues increased strongly by 11.1%, in constant rate, while organic growth was 10.4%. The strong growth was equally driven by North America and several LatAm key countries. The organic growth in Asia was 10.7% strong, in most markets mid-single to high-single digit growth was achieved while China, Australia and Japan posted double-digit growth. Next slide, please.
FTEs at the end of the first half '23 increased by 2.2% versus prior year, primarily driven by organic growth partly offset by the impact of restructuring. Average FTEs in the first half '23 increased by 2%, clearly, lower than the total revenue growth of 8.5% which is a function of pricing, as well as productivity increases from the various Level Up initiatives. In all regions, revenue growth is clearly exceeding the growth in headcount. Next slide, please.
The organic contribution to the adjusted operating income of CHF462 million, was with 10.8% strong. As outlined before, this was to a large extent offset by the currency impact, so that the adjusted -- excuse me, so that the reported adjusted operating income was broadly stable in actual currency. Currency had a negative impact of 9.4%. Next slide, please.
On this slide, I would like to highlight to you how our digital strategy which drive growth and productivity going forward. First of all, we focus on the four-week for business priorities. Five, material productivity improvement, deliver a different customer experience, capture incremental digital revenues as well as internal operations and employee experience. The digitalization will be enabled by the deployment of the free selected technologies, namely applications and platforms, AI machine learning, as well as robotics and automatization.
Based on this concept, we will execute five digital flagships. First, Digital lab program. The rollout of the digital lab program is accelerating. As of the first half '23, 27% of our lab revenues is migrated to one of our global digital lab platforms well on track to exceed the objective of 30% for this year. The migration is more advanced in our minerals business in which we see how our productivity increase is strongly contributing to our margin increase.
Second, given the good experience of the digital lab program since its initiation, we recently decided to launch a similar global program for our field activities representing 45% of group revenues. We initiated the first pilot for Digital field services in Latin America, a region with high exposure to field activities, while the technology has been validated and free successful MVPs for field services delivered by our digital builders' organization. The deployment of digital lab and digital field services should lead in the first step to productivity increase and the second step also capture incremental revenue opportunities.
Under the digital customer experience program, we fully deployed sales force as the global CRM solution and started to scale up our enhanced customer portal and other solutions to increase the client intimacy. This flagship will be the single point of contact of our customers to digitally interact with SGS. The next generation data and intelligence program will support the variety of initiatives all other programs related to data in order to ensure that the levels of data coming from our new digital platforms.
Under the Digital workplace and shared service program, we bundle a variety of Level Up initiatives such as financial shared service centers, centralized building, world-class services in which we see the accelerated impact of productivity improvements while recently implemented workday as a global HR solution enhancing our employee experience.
All five flagships will be supported by our digital builders' organization, which will accelerate the time to create a product out of an idea and scale it up within our organization. We launched the builders' organization exactly one year ago, and on the following slides, you will find a variety of successful MVPs, MVP stands for minimum value products and where they stand today. With these initiatives, we are building a strong platform for growth positioning SGS as a more resilient and productive business as the benefits realizing from those investments, margins and returns will increase.
Next slide, please. This slide shows some examples on the progress we achieved with our digital builders organization launched one year ago. Just to recap. The purpose of the builders organization is to take an idea and built a minimum value product with next three to four months depending on the idea. During these three to four months, colleagues from the business, colleagues from our group IT organization and depending on the projects external partners working together to establish an MVP including the definition of the business benefits.
If the MVP is successful, the solution will be built and will go live in the pilot country or pilot business with the aim to scale it up to a large extent via our five digital flagships. In the meantime, we have four MVPs, which we scale up in the relevant businesses globally. The Windgo solution is going live as we speak and for Simiprom, we're currently building the solution.
We also use the digital builders organization to test new technology in collaboration with our strategic partners. The builders organization is instrumental to assure the great ideas from our network, our partners are captured, tested and implemented in a way that we can scale them quickly.
Next slide, please. Here we talk about the margin development by business. The margin decline in Connectivity and Products of 230 basis points is mainly attributable to the positive impact of collections in TFS services in the prior year partly offset by the recovery of China. The margin decline of 260 basis points in Health and Nutrition is a function of the conclusion of COVID-related testing in the prior year and the temporary slowdown in new product development in Health Science. The margins in the food business improved nicely.
AOI margin industrial environment increased by 170 basis points to 10.2%, benefiting from the savings of the prior year restructuring program continued integration benefits of acquired companies and strong pricing. AOI margins in Natural Resources increased by 210 basis points to 14.3%. The strong operational leverage is a function of growth, acceleration, also from good pricing in trade and inspection activities, as well as productivity benefits from the digital lab program, which is more advanced in our minerals business.
Adjusted operating income margin increased 40 basis points in knowledge, as the result of an increase in volume and pricing, partly offset by higher travel costs, given the return to onsite audits.
Next slide, please. Operational net working capital stands at 2.5% of revenues in H1 '23. The higher net working capital need is a function of strong growth. That being said, the cash outflow in H1 '23 is materially lower than the prior year and somewhat lower than two years ago SGS (ph) also improvement was driven by our centralized bidding projects and strong focus in -- on cash collections.
Next slide, please. Cash flow from operating activities increased by 40.3% to CHF369 million compared to the prior year as net working capital need was lower. We spent net -- CHF140 million net CapEx and CHF8 million for smaller bolt-on acquisitions. Dividend payments as well as NCI transactions amounted to CHF606 million. We paid back CHF325 million bond and CHF300 million from our sustainability revolving RCF. All this leads to a cash position of CHF1.1 billion at the end of the reporting period.
Next slide, please. Gross CapEx for H1 '23 decreased by 8% to CHF143 million, so this is an actual rate and constant would be down 1% and is in percentage of revenues with 4.4% slightly lower compared to the prior year. Net CapEx stood at 4.3% in '23. We continued to invest into our strategic priorities and our digital lab program, but temporarily slowed CapEx allocation somewhat in our Health Science business given the more challenging market conditions in the short-term.
Next slide, please. Thank you. To sum it up, our revenues in H1 '23 increased by 8.5% in constant rate of which 8.1% is organic. Our adjusted operating income is growing with 11.3% double-digit in constant rate. Our operational cash flow strongly increased by 40.3%. The decrease in return on invested capital is purely a function of the lower profitability in H2 '22 versus H2 '21 as it is calculated on an LTM basis.
With this, I hand back to you, Frankie.
Thank you, Dominik. So let me go through the outlook for our five divisions for the second half of 2023. Let me start with Connectivity and Products. So Connectivity and Products second half organic growth should remain similar to first half. As in first half, our underlying margins will remain robust, but the full year level will continue to be impacted by the strength of the comparable period, which included a benefit from the collection in Trade Facilitation Services.
Separate and de-risking country (ph) -- continue in China with less complex and lower value items particularly in Hardgoods on soft lines moving to other countries such as Vietnam, Turkey and India. China will remain competitive in most connectivity-related products for the foreseeable future.
Our continuous investment in capacity building in other countries outside China has allowed us to support our customers in this supply chain evolution. Likewise, our diversification strategy from international trade to the China domestic market has supported our strong growth in China. This despite the current concern of our clients regarding inventory level, new SKU development, and in general, a possible softening of the retail sector.
Growth in Trade Facilitation will remain below the divisional average due to termination of government contract in Africa and continuous impact on [indiscernible] related to the war in Ukraine. Health and Nutrition organic growth in second half should accelerate with improved profitability. This is the result of a better order pipeline and no further residual impact of COVID-related activities.
Both food and cosmetic will continue their strong growth path into second half with good demand coming from most geographies and increased utilization of our newly invested food laboratories in Latin America. Health Science should see the strongest rebound in growth, both in Europe and U.S., benefiting from a solid order pipeline, and we expect a marked improvement in margin.
We're also continuing to make new investment in our health network in China as we remain confident of a significant long-term opportunity in this market. Industry and environment, organic growth should remain strong in the second half. Growth momentum will continue in Health & Safety with evolving regulatory framework and growing ESG concerns.
Technical Assessment Advisory will remain soft as we complete major project, mainly in Latin America and transition to the start-up of new ones. Overall, the market dynamic remained positive. Growth in our field services and inspection will remain strong with increasing demand for our supply chain activities. This is particularly the case in project related to energy transition and nuclear.
Environmental Testing growth will accelerate in the second half, supported by an improving pipeline and project win in North America, Europe and Australia. With the increasing volume, we expect margin to develop positively. Natural Resources organic growth is likely to be slower in the second half compared to the really good growth rate of the first half but should remain at a strong level.
The market fundamentals at the mining industry remain strong, but we do expect exploration funding to reduce compared to the prior year. The demand for steel and critical minerals is supported by the investment in extensive infrastructure and no residential project in many countries and domain links to energy transition remains.
In trade, to rebound agricultural services seen in the first half will continue in the second half with good crop conditions in key countries such as Canada and in Europe. However, the impact from [indiscernible] has been the consolidation of the important fishmeal season in Peru as the fish have moved further offshore to avoid the higher temperature.
In addition, the recent non-renewal of the Corridor agreement between Russia and Ukraine has already seen price of grain spiking and some concern on trade flow impact out of Ukraine. The exact impact still needs to be assessed in coming months but could affect our agri activities. All gas and chemical trade and testing is still volatile with many uncertain geographical and economic factors. However, we expect similar growth moving into second half.
And to finish on Knowledge. Knowledge organic growth will also be slower in the second half compared to the double-digit growth of the first half. However, growth will remain strong in the second half as well. The expected slower growth is mostly related to our leading position in certification in China, which benefited from the softer comparable period in first half with the lockdown of 2022.
As in prior year, the underlying market conditions for certification remains solid, especially we see increasing demand for certification scheme related to medical device, information security, system APT (ph) and food. We're also seeing a strong increase in demand for customized audit schemes related to social audit, supply chain management and ESG.
Sustainability Assurance solutions, which is part of our ESG service offering is an emerging business and is our fastest growing segment in Knowledge. Our consulting activities continue to progress well and we're looking at another solid semester moving into second half backed by the strong pipeline. Both our operations in the U.S. and Europe are enhancing their value proposition with increasing component of ESG into their training and consultancy services.
So in terms of outlook, our guidance for the full year '23 is mid to high-single digit organic growth. This is an increase from a previous guidance of mid-single digit organic growth, improved adjusted operating income and margin at constant currency, strong cash conversion, leading tick underlying return on investor capital, as we said earlier, this will be stronger in the second half and stable dividend.
The last slide is a reminder of our different objectives in terms of People, Planet, and Performances for the 2020-2023 (ph) plan that we were going to conclude end of this year. So I'm not going to go through all the details, but you can read it. Maybe in conclusion, we are pleased with our first half performance at 8.1% organic growth, reflecting our improving growth profile. We showed good underlying margin in the first half, and we expect a stronger performance in the second half.
On that, thank you. And I think, Toby, we can go through the Q&A.
Thank you, Frankie. If we could start the Q&A with Daniel from ZKB, please.
Yeah. Thank you very much. Hello, everyone. I would have two questions. The first on margin. You have 40 bps better, but could you describe a little bit the moving parts? Because I think you have 80 bps of savings. It's a restructuring program. You have some support from China and also stronger pricing. So what stopped you from a better profitability in the first half? And my second question may be on personnel and energy costs, what increase you have seen in the first half and what do you expect going forward? .
Thank you, Daniel. Maybe, Dominik, you want to address those two questions?
Yeah. Sure. Thank you, Frankie. Good morning, Daniel. Good afternoon. So basically, if we look at the restructuring things, they are completely there. The situation is that our, like, we also flagged at the beginning of the year, that the energy cost increase is quite significant, especially in the first half of this year.
And this is related to the fact that in the prior year, first half, we are still benefiting from energy contracts and I talk primarily about Europe from energy contracts concluded before the conflict, Russia, Ukraine. While now we have the full impact of this higher energy costs, yeah. So the energy costs in the first half are very high. They will definitely slow down into the second half year. And on top, the base effect becomes easier. That's the first point.
The second point is also that as we also outlined before is we definitely have more travel costs, yeah, we have much more on-site work to do than before. And this is especially relevant since the beginning of the year as China opened up, even last year where we had locked downs, but they were often location locked downs in general in whole China obviously, traveling was rather on a lower level, given the COVID concerns and now it's completely back and this has also quite some big impact.
And furthermore, I would say, especially in the first three months of last year, traveling in Europe was not fully back because we had Omicron. So these two key components are basically eating then some of the margin increase away. But both of them will be much easier in the second half. On the energy cost, it's also related that sequentially energy costs will go down. And on the travel cost, it's a function that things getting basically easier comps or the normal run rate in the second half is a bit easier.
Then on your second point regarding wage inflation, I think this was the point. It's around 5%, close to 5%. And obviously, as we said, on pricing, more than half of the revenue increase is pricing. So it's actually very close to also pricing is in the higher 4% area.
Thank you very much. And you covered the energy cost question in the first question anyway. So thank you for that. The next to ask a question, please, Annelies from Morgan Stanley. Please limit it to two questions as a reminder, everyone. Thank you.
Hi. Thanks, Toby. Yeah, two questions from me as well, please. So just following up on that pricing point at the end. So you said the majority, sorry, more than half of pricing of the organic in first half was pricing, so I'm guessing 4-point-something (ph). What are you expecting for pricing in the second half? And do you have a target in mind in terms of how to reach the margin progression that you're expecting for the full year and relative to where consensus is?
And then secondly, Health & Nutrition, you mentioned, I think, a temporary slowdown in new product development and little bit short-term volume impact. How confident are you in the recovery of that and over what time frame? Perhaps you can comment on how much visibility you have on that returning either into the second half or going into next year? Thank you.
Hi, Annelies. Let me go through the second question and Dominik can go through the first one later on. So on the Health & Nutrition sectors, it's also a market situation where I think the funding of the early drug development was a bit soft in the first half of this year. We are seeing already a more stable pipeline in the second half. So in our view, the capture will start clearly on the second half in terms of, as I mentioned in my outlook, that we're looking at a marked improvement in terms of growth and margins into the second half of this year.
We should be able to develop from then on into 2025 and so on. So the momentum is already happening and we're seeing a better last month after the first semester and we should see that continue across the second half of this year. So I'm pretty confident in terms of the order pipeline. Some of the project for the first half was delayed to the second half. So I'm pretty comfortable that those projects will be executed and will be moving into a more stable market conditions for the second half of this year.
Dominik, you want to tackle the first half.
Yeah. So regarding pricing, so the statement that more than half of the revenue growth comes from pricing is not only for organic. It's also for the overall growth rate of 8.5%. So pricing is in the higher 4% area in the first half. I would expect to tick this a little bit more up in the second half, but still, let's say, let's call it, close to 5%, ending up the year because a lot of the price increases were implemented also beginning of the year. And then throughout the year, you have a bit of an uptick, but it's not that material. So I assume, we end up in the very high 4% area, close to 5% in terms of pricing for the whole year.
Regarding the margin development and consensus expectation, if I'm not mistaken, consensus in constant rate is looking for the full year around 70 basis points, 80 basis points AOI margin increase. In the first half, we have plus 40 bps, that would imply second half, which is more weighted in terms of profit, a bit more than 100 basis points, which we feel very, very comfortable for several reasons.
First is related to what I said before, as I answered to Daniel's question on the easier comps for energy cost plus the fact that also sequentially, energy costs will slow down in the second half. There's also a bit easier comps on travel costs in that regard. And I would say, in general, the non-personnel cost inflation is somewhat softer. And then the second point is, obviously, there's also a clear expectation from a bit more bad debt recovery into the second half, where we are pretty confident to achieve this, but that didn't have an impact on margin first half, but we are pretty confident for the second half.
Now one could argue we had a bit of easier comps in China in the first half, but I would like to remind even the second half last year was operationally for our colleagues in China, not easy because we had constant city lockdown. So operationally, it was quite challenging to move samples. So created a lot of -- in the second half last year, a lot of additional logistic costs and other costs and the December was a month where after the opening up of the economy, sickness rate in our business, like, I would say, in the whole workforce in China was in the second half of December by around 70%.
So therefore, I'm confident that we show, yes, also in the second half in China, good leverage. And I also would like to remind, if you recall, second half last year was as a bit softer in Europe, not only energy cost, also demand side. So overall, we are quite confident that margin will nicely accelerate into the second half and can live with this consensus expectations.
[Multiple Speakers] Thank you.
Thanks, Annelies. Next up, could we have Suhasini, please, from Goldman Sachs?
Hi. Good afternoon. Thank you for taking my questions. Just on the Connectivity & Products. You mentioned that the collections and trade facilitation services impacted the first half margins. Can you please quantify the impact on the margins in first half and maybe confirm that there is no further impact on second half? And second one is the FX drag on margins that was there in the first half. At current rates, can you please help us understand what you see as the drug for second half, if at all, on margins? Thank you.
Dominik, you want to tackle both questions?
Yeah, I will do this. Good morning, or good afternoon. So basically, the TFS impact was more in the prior year. And we had -- if you recall, in the first half last year, we mentioned in the half year report, first half last year, our C&P margin was pretty strong despite the fact that we had this lockdown in Shanghai, which is partly that our colleagues managed the lockdown very well, but it was also pretty strong because in the first half last year, we had strong collection and we mentioned this in the first half report last year.
Now obviously, this was last year, so the comp of this collection, which was in the higher-single digit million in the first half last year is from a comparison point of view. That's the reason why the comparison margin for this year is rather high. So has not too much to do now with this year or the movement into the second half. Now from a margin point of view, based on the year-to-date data, we have around 40 basis points track from a kind of currency impact and we see this pretty similar for the second half. It could be 10 basis points more, but yeah, very similar first half, second half.
Thank you.
Thank you very much. Next, Will, I’m going to go ahead, Will from SocGen (ph), please.
Thanks. I just wanted to talk just a bit about the margin again. So the first question is on that. Just if you could talk about the move in the bad debt provision. So if you could just work out what benefit that was last year versus this year? And then the other one-off impact was I think in the [indiscernible] related testing, which I actually thought had already washed through. So if you could just maybe help us quantify that one. And the second question, unrelated, just looking at kind of leverage and thinking about M&A and things. Is there a point at which you look at the divi (ph). Just be interested in kind of capital allocation thoughts on that one. Thanks.
Dominik, you want to tackle the margin question?
Yeah. So basically, if you look to the margin, if you recall last year, we said that roughly the impact of bad debt, additional expenses last year was around CHF20 million, yeah, last year. So in the first half, we were neutral compared to the prior year, while we had in the prior year release in like this TFS thing and we expect that this amount or the majority of it, we can reverse in the second half of this year. And this, of course, will contribute to the margin increase.
Then, Frankie, you want to take the next one or should I take the...
You can take it. Go ahead.
So basically, on the vaccine testing, like we said, for the full year, we still will have a bit of a track higher-single digit million revenue in the first half from vaccine testing, but this is now for the second half, it's kind of washed out. But second half prior year still had something in. And the last question was related to capital allocation, right? .
Yes. On the capital allocation, your question is about the dividend. We said we'll keep the dividend stable until we reach more or less 75% payout ratio. So we're going to stick to that is why we set stable dividend. And obviously, acquisition is a priority into our strategy as well, that market was a bit soft this year for us and we'll continue to look at this and we should be moving to a more active year in 2024.
Thank you. As a reminder, two questions each. And next, we will have Arthur from Citi. Please go ahead.
Thanks, Toby. Yeah. First question for me. In the first half of the year, what's been the impact relating to unwell Chinese workers. I imagine this would mostly have been in the first month through (ph) the year following the reopening. But I just wonder whether you could give us an idea of that, especially as it relates to Connectivity & Products? And secondly, I was just wondering, if you could give us an idea of the kind of wage inflation that you've seen in the business and what you're expecting for the full year? Thank you.
Dominik, you want to...
Yeah. I take that. Yeah. So basically, if you look to China, obviously, we had opening up of the economy and then we had 70% sickness rate kind of in December. And surely, this was also expected, there was a knock-on effect into January because also a lot of clients basically said, we have high sickness rate in December that people will be not all healthy on January 1, plus Chinese New Year was rather early in the year this year. So basically, they decided not to start operations before the Chinese New Year, so to say. [Technical Difficulty]
Sorry, Dominik, I think you are cutting out.
Sorry, this is the operator. We lost connection with Mr. de Daniel. Just a moment.
So maybe I'll continue to answer the question for the first part of the question. So indeed, the sickness rate was quite significant in the beginning of the month for the first two weeks and luckily, in terms of timing, I would say, we managed to roll over into the Chinese New Year. So in a sense, you can assume that the month of Jan was pretty close, pretty flat, pretty subdued in terms of margins and in terms of revenue because most of our operation was closed. I don't know whether Dominik you're online. You have a number. I don't think we will give a number on what happened in China for the first part of the year.
No, we haven't. Sorry, my line was disconnected. So I'm now back. Did you answer the question on the January impact of China...
Go ahead, but we don't quantify the impact of the first month of our operations in China. So but we gave the explanations. Maybe you can go through the second part of the question, which was...
The next question is on wage inflation, the impact so far this year and in the second -- expected for the second half.
Yeah. So wage inflation was, let's say, in the higher 4% area in the first half and we expect a very similar number, maybe close to 5% also for the second half. So yeah, close to 5% will be the number pretty aligned with the pricing.
Okay. Thank you very much. That's it for those questions. Next up, we've got Oscar from JPMorgan. Please go ahead, Oscar.
Thanks, Toby. Hi, everyone. Two questions. The first one on Connectivity & Products. Growth ex-China was 3.5%. Can you just give us some color on what you're seeing in June and July around retailers and inventory levels? What's your outlook for growth in the second half? And then the second question is in the Knowledge division. You talked about growth being benefited from reopening in China. How much was that growth ex kind of the Chinese benefit? And how do you expect knowledge to perform in the second half? Those are the two questions. Thank you.
Okay. I'll take the first one. Dominik, you can tackle the Knowledge one ex-China. So on the first question, for June, May and June, the volume is still stable. In fact, interestingly, the hard goods and the soft line volume was pretty stable for us. The part of the volume that was a little bit softer in the last two months of the first half was Connectivity partly in Korea and in Taiwan, some of the room as drop a bit. I think it's a question of development cycle as well as some of the 5G infrastructure development was not at a speed that we're expecting. So there is an impact on the amount of a new model development.
But generally speaking, I would say the retail market is kind of worried about a little bit of the softness in the second half with higher inventory plus a discussion on the SKU development, number of SKU, which is an important factor for us in terms of our testing volumes. But nothing that we worry too much about because in terms of diversification of our portfolio into some of the domestic market, including China. We see, as I mentioned earlier, a similar kind of growth pattern and some of the development cycle for the connectivity will come back in the second half of the year, which was a bit softer. But I have no concern on that. I think we'll be at a similar level as what we've seen in the first half of the year with some moving part between soft and hard goods and [indiscernible] I would say.
Dominik, you want to talk about the impact of the uptake on the Knowledge one in China?
Yeah. And maybe one additional remark, when the question was said, it was mentioned, the growth excluding China of C&P was 2.5%. It was 3.5%, yeah, so not 2.5%, 3.5%. So before Frankie answered. Now on the Knowledge business, China definitely had an impact. But if you would exclude China, we would have grown also double-digits. So it's not because of China -- that only because of China, that the growth is very strong. And as I said before, a lot of this was also coming from consulting business where we had strong demand. The growth rate will slow somewhat into the second half, it's not 14% sustainable, but it will be a strong growth rate in the second half.
Thank you very much. James Rose from Barclays is next. Please go ahead, James.
Hi. Thanks for taking my question. First one is on pricing. Can you give an idea of where it contributed most across the divisions in the first half? And then secondly, looking at industry and environmental margins, it's quite a high drop your rates comparable to other divisions. Can you sort of talk through how you manage to receive that? Thank you.
Yeah. So basically, if we look to pricing, it is -- I would say it's less a function of a division. Of course, I can give you the divisional impact. It's more a function of the end market in terms of country end markets? Because in this more inflationary environment, especially when wage inflation is kicking in is often a function of the wages. And therefore, let's say, above average price contribution, we're definitely in businesses like natural resources, like also industrial and environment because those businesses have more exposure from a country point of view to countries where we have above average wage inflation.
On the I&E business, I think that, first of all, to your question, why is this a good, obviously, a good pricing effect is also helpful there, and we benefited there as well from good pricing. But the other things are definitely that if you think about the restructuring program, which we initiated in autumn last year, it was relatively speaking, more geared to Europe and industrial environment. So this is definitely one reason. And furthermore, we're seeing also more cost synergies from the integration of our acquired businesses, especially in environment business. So that's the reason why the kind of incremental margin relatively speaking, is quite strong in this part of the business.
Can I just add for industrial environment. Also, the evolution of portfolio is important as well. We have more work activities there haven’t which – health and safety sectors, which typically has higher margins than the more traditional construction supervision sectors as well as in the supply chain which has a lot to do with the energy transitions, wind farm, nuclear and so on. So this is also the mix of the portfolio, the transition we are trying to push through is also an impact on the way we look at margin as well.
Thank you, Frankie. Next, we'll have Karl from RBC. Karl, please go ahead.
Yeah. Thanks very much. A couple of questions from me. Firstly, just in terms of M&A. Frankie, I think you said, if you recall correctly, that you would expect to do a bit more M&A in 2024. We've obviously come off a very lean period for M&A in the first half. So just an update as where the M&A pipeline is sitting, what you're seeing on the ground in terms of competition from private financial buyers, et cetera.?
And then my second question, again, probably directed to you, Frankie, just in terms of the recent management change announcements. Just in thinking about the kind of scope of reviews that Geraldine might be doing when she rise in December and how that's likely to dovetail with your strategy planning cycle, which I think you're planning on announcing in May of next year. Just what kind of on limit off limits for her? And then how you're potentially thinking about your own position in the organization on the medium-term view?
Sure. I'll start with the first question, which was M&A. Yes. In fact, clearly, our first half performance is rather subdued in terms of acquisitions. So we are looking at a pipeline is developing. Certainly, the high inflation and high interest rate out there is bring position against some of the competition we have -- we've seen in the past few years, not necessarily from our strategic but from some of the financial institutions, private equity and so on.
So I think at one point in time, as the market evolved, some of those assets that was acquired by them will have to come up on the market as well as some of the assets in terms of market consolidation. So we are looking at a different avenue in terms of Health & Nutrition, Connectivity, Environmental and Energy transitions. These are certain of the assets we're looking at. And I believe that as we see the market improving, evolving we should be able to see more opportunities and certainly more deals move into the second half and certain more so in the 2024.
Your second question about Geraldine, I would say it's too early for me to comment. We clearly have a plan. Dominik is still with us until end of the year. So the three of us will be working together with the rest remain of the ops council to look at the evolution of our strategy. You're absolutely right to say that the end of '23 is the end of the cycle for us, our current strategy go from ‘21 to ‘23. We're in the middle of the review of this strategy for next cycles and certainly Dominik and Geraldine will work together with [indiscernible] and myself to ensure that we have a [indiscernible] strategy moving forward by taking the strength of Dominik and strength of our Geraldine can bring to the organization. So this is work in progress and I will come back to you once we have more details on that.
And the last part of your question is about myself. I don't know what you say. I mean at the end of the day, it is an evolution. I would simply say that like in the corporations, at one point in time, whatever this point in time means, is the evolution of the organization. For the time being, we're looking at the strategy and we're continuing to evolve on the strategy, and this is the most important priorities .
Thank you very much. Next up, we have Harry from Bernstein, please.
Hi. Good afternoon, Frankie. The first question is on the growth performance and the comments about making market share gains in CMP and knowledge and specifically in soft lines. I wondered if you could just go into a little bit of detail on how you compete for share in those areas and where the successes are coming from?
And then the second question is just on disposals. You mentioned in the presentation that you expect that active portfolio management to accelerate. So two disposals in H1. Can we expect a higher number in H2? And then I guess more importantly, could you give a little bit more color on potentially how much cash inflow we could see from those disposals in the medium term? Thanks so much.
I'll answer the first part and Dominik, you can tackle the second part. Is it okay with you?
Absolutely.
Okay. Let me go through the first one. I mean in terms of the market share gain, certainly, they are linked to our strategic key account. I think it's more about the customer service, the turnaround times and the integrated packages where we can offer a more complete portfolio across different geographies, across different specializations of the product with its chemical testing, whether it's a physical properties and so on.
So these are really the process that we have worked on with the stronger interaction with our customers over the past several months or a couple of years, I would say. And then we're seeing now the return on this strategy where we have a much more customer-centric approach to what we're doing rather than just a testing approach, and this has seen us make the differences, and this is where we are gaining quite a lot of new accounts.
And then Dominik, the active portfolio management please?
Yeah. So we kind of concluded two disposals so far in the first half. There are a couple of more to come in the second half potentially into ‘24 we'll see when they get closed. But those are from a scale -- not, let's say, huge units and some of them have also subdued profitability of returns. So I would not expect too much from an inflow in terms of cash, there will be some inflow, but it will be not that material in channel because those are rather smaller businesses, which we sell now piece by piece.
Thank you. And the final person on the call before we move on to questions from submitted on the web is Rory. Please go ahead, Rory.
Good afternoon. Just one left for me. It's on knowledge. I understand the outlook is the division to slow overall a bit. But can you talk about the outlook for the customized audit businesses? Just there are lots of new and recent regulations coming in around things like forced labor bands, deforestation and things like that. So can you talk about how much head count you're adding to that area, how you can grow capacity and just maybe some sense of what proportion of your customer base is looking at or taking up these customized audit solutions. Thank you.
Sure. I can answer this. In fact, the customs audit portion of our business is probably one of the fastest growing now. You're absolutely right, there are quite a lot of schemes linked to ESG. So I think there will be a convergence of the different schemes in the long term in terms of standardization on the ISO or all the organizations. But for the time being, they call a lot of activities from our customers in terms of need to understand how to evolve.
So we do a lot of carbon calculations. We do a lot of ESG cap analysis with also a lot of consulting to some extent and training on all this aspect. I wouldn't be able to tell you how much we don't give the exact number of how much is linked to our solutions services. But I would say it's the fastest growing by far. And it is also a quite sizable amount of customers is incurring about that.
And I would say this will be a key driver for the next few years in terms of the way we look at growth. Besides the traditional satiation schemes, this is really the area where we see the most demand today and will forever an increase after the activities after the standard of the different governments putting more standard or certification scheme on the market and more requirement as well.
Thank you very much. Frankie. So we move over to the web and I will read these questions out and direct them, I guess. So the first is from Neil Tyler and I'll ask two of your questions, which you've submitted three, but I think one has already been answered. So within I&E and Natural Resources, both are delivering organic growth comfortably above the medium-term targets we outlined a couple of years ago. Other than the influence of commodity cycles, has anything changed to alter your medium-term growth perspective for these divisions, Frankie?
You're talking about Natural Resources...
Natural Resources and I&E.
Yes. I think the natural resources, the way we look at the energy transition is an important factors. In fact, you look at the demand for critical minerals, whether it's lithium, cobalt, copper and so on are all key component for this energy transition and we're seeing more and more demand on this aspect. So I would say, we are well positioned in these sectors. And if our outlook for the medium term has changed is more on the oil and gas side more than on mineral side because we always believe that the mineral sector also key sectors that we need to be focusing on. But more so now we have additional drivers is linked to the energy transition, it is very interesting to us.
Likewise, for the agricultural sectors, we always said that this is a seasonality business and we had a couple of bad seasons. And this year, the seasonality is positive. But again, with the climate change with all the care urgency that we're seeing, the seasonality will be even more fluctuating and we're probably going to see a more volatile market conditions. So on that one, we're still committed because we believe that in terms of food security, food safety and so on, this will be a core value proposition for us in the longer term. So we are quite bullish on that.
The only one that's still on [indiscernible] geopolitical situation and the influence of net transition is obviously all gas and chemicals. But again, or gas and chemical is a lot of company in there, while we focused a lot on the burning of the field. You also have the political chemical industry, LNG, the gas in the chemical industry and so on. So all that aspect make that we're still quite interested into natural and resources sectors.
More so that I think I already said in the past, just walking away from it does not resolve the program for the planet. So we're more looking at changing the way we look at our services to help our customers to be more sustainable, right, than just walking away from the sector altogether, but this is the way we're looking at for the moment.
Thank you. And the next one, for Health & Nutrition, over what time period would you expect the health science lab capacity become more fully utilized to improve the divisional margins? And if I start, Frankie, and then if Dominik has any additional comments.
It will depend on the different locations, I think we have excess capacity in some locations. For example, in Glasgow, I think we are wrapping up our volumes to replace some of the COVID testing that we had. China is emerging. We invested quite significantly into China. So we're expecting the volumes to pick up in the next couple of years. We're looking at the further development in India as well. So there are capacity in there that we need to further enhance and build upon. But in Europe, the capacity is well utilized with some up and down. For the time being for the first half of this year, will a bit slower than we anticipated, but we should see the productivity back to a certain normality to all the second half of this year and moving to 2024, but it really depends on the different regions. .
Thank you very much.
Dominik, you want to add something?
No, I think you were pretty conclusive. Yeah.
Thank you. For Tom Burlton, he's got three questions. Tom, I think we've answered your health sciences one already. So I will assume that you can come back to me if you need to have that one answer, but I think it's been covered a couple of times. So the first one is in C&P. Can you give some color on price versus volume? C&P looks like the only division where you haven't made reference to price increases or pricing initiatives in the statement. Can we infer that there's been less of a price tailwind there. And organic we've seen has been more volume driven or driven by the China recovery. Could you give more details whether there was a bigger cost versus price headwind here that might have affected margins? I think that's for Dominik, I would assume.
Yeah. Dominik?
Yeah. Definitely, so I mean, obviously, also C&P has price increases. I mean all divisions have price increases. But C&P definitely to a lesser extent, there definitely the volume is the stronger driver, but this has also to do, like I said before, with the underlying wage inflation in sort end market and the end markets for C&P or where we are the countries who strongly put good to C&P. The wage inflation is also lower than the average of the group. So definitely, C&P is the area very benefiting or where the volume is the more dominant component to the growth.
Thank you. And then I'll ask Tom's second question. When we're thinking about the margin bridge for the second half, how should we think about the relative contribution from bad debt collections and the payoff from energy measures? What gives you confidence these bad debt collections will come through, and that's dominant, please?
So on the energy cost, as I outlined, last year, basically, energy costs kind of ramped up from H1 to H2 because H1 last year, we still had contracts in place prior to the Russian-Ukraine conflict, while then in the second half, we have seen increased [Technical Difficulty] So while we see in the second half last year then higher energy costs and this year just the other way around. So that's obviously a contributor in a positive way. And regarding the bad debt, bad debt was in the first half neutral. I mentioned already last year, we had a negative of CHF20 million. So we're expecting definitely a clear positive in the second half of the year.
Regarding the confidence level. Obviously, this is only there when the cash is in, but we are pretty confident because there is one particular client situation. with relevant bad debt position, where we have a kind of global commitment to resolve the situation in the -- yes, I would say, rather in the beginning of the second half. And this kind of global commitment gives us definitely confidence that we see there a positive impact in the second half of the year.
Thank you, Dominik. We've got quite a detailed margin walk question from [indiscernible] . I think you've talked about many of these points anyway. But Dominik, do you want to give us a few more high-level comments, and I'll read it out now. Could you give a more detailed walk on first half adjusted operating profit growth, cost savings, pricing, what are the offsets? How much is travel bonus energy up in the first half? And any other organic cost comments, please?
So basically, we have, on the one hand, we have the restructuring savings. And you can say, simplified around CHF25 million. and this is more or less eaten away by incremental travel cost and energy costs roughly. And then the kind of underlying wage inflation and pricing, as I mentioned before, we are pretty similar, but that had no impact. So subsequently, you have some productivity increase leading to a 40 basis point margin increase in the first half.
Thank you very much. Then the final question is from Kulwinder from AlphaValue. Could you clarify for us if there's any pricing or margin advantage across sustainable solutions compared to other offerings? And if yes, could you give some details behind it, i.e., leadership position, scale, competencies. And do you think that in the long term, it is reasonable to expect this part of the business will grow faster than the group average, and that's for Frankie.
I'm sorry, which part of...
For sustainability solutions compared to other offerings.
Sorry, other offerings in the [indiscernible]
I assume that is related to the framework. So it will be the 47% that we have of sustainability solutions -- of our internal sustainability solutions framework.
Well, then I'll try to answer the questions. So we mentioned that if you look at the development of the [indiscernible] market out there for timing, a lot of the discussion is all about current all about eating schemes across the latest regulatory framework, CRD and so on. So I already said that these are really a snapshot of what the markets look like, how a company looks like in terms of the way they are simple against this new directive.
But as you move into the maturity of this process, it is clear that the company that has the more technical aspects and more technical skills to help those companies to migrate from their current snapshot of what they are, toward what they need to be in the future because this requirement will become more and more strengthened over time. We are well positioned in terms of our portfolio in terms of the auditing, consulting, training technical aspect of how we manage waste, manage chemicals, use manage carbon emissions and so on. This is read the package of the portfolio that we see in terms of long term for us to have the differentiation against some of our peers or some of the other industrial players that will play in this part of our market. You've answered the question.
I think so. And of course, there's significant amounts of regulatory change going on at the moment.
Absolutely.
So with that, I think we'll draw the call to an end. So thank you very much for your time. As I said, we'll look forward to seeing some of you over the next weeks and then later in the year. Thank you very much.
Thank you.
Thank you.
Ladies and gentlemen, the conference is now over. Thank you for choosing chorus call. Thank you for participating in the conference. You may now disconnect your lines. Goodbye.